Final Expense Life Insurance - A Mistake?
The life insurance category known as final expense coverage is also called funeral insurance or burial insurance
. This type of insurance is simply a life insurance policy with a small death benefit. For most people other kinds of life insurance will be better choices.This type of life insurance is typically sold to an insured with the idea that the the insured's family cannot afford the burial costs (currently averaging around $8,000), The insurance plan is designed to cover those costs. There are several drawbacks that are rarely mentioned, however.
When a beneficiary is named on the plan, and the policy pays the death benefits, the money belongs to the beneficiary. They can use the death benefit money any way they decide to - there is no legal obligation or requirement that that they cover the decedent's final expenses.
If the estate is named beneficiary, then the proceeds must be used to pay ALL debts of the estate. This means that, depending on the financial status of the recently departed, and how the assets are allocated towards debts, no funeral costs might be paid at all.
Another crucial factor it's very uncommon for the burial expense to be the family's only concern. If the family needs help paying final expenses, most likely there are going to be other ongoing expenses that will no longer be able to be met. This may include rent or mortgage payments, taxes, additional child care costs. Extra money may now be needed to pay for the expenses that the insured used to take care of.
Finally, the cost of insurance for these particular types of contracts, relative to the coverage amount, is very expensive. Sometimes it's disguised by breaking the payments up by the month, or by having preset "age group" rates where as the insured ages, the rates automatically go up.
One major advantage to this type of plan, is because it is written for a relatively low face value, the underwriting process is more lenient. You can buy a final expense life insurance policy as either a whole life plan or a term policy (which typically will expire and be non-renewable after the age of 80). There is no medical exam, simply a few medical questions that have to be answered. Because of this, these life insurance plans will either have a waiting period before the death benefit will pay out (typically two years), or will have a graded death benefit payment over several years, until the full death benefit amount is payable. This helps reduce the adverse selection losses where people wait until they are unhealthy before purchasing insurance coverage.
Like any other type of insurance, life insurance is a tool - a financial tool. In order to select the proper tool, the job must first be defined and defined carefully. Is there a time in the foreseeable future when insurance won't be needed? If the goal of the insurance is to put children through school, the answer is yes. If the goal is asset transfer outside of the estate, to avoid paying estate taxes, the answer is no.
Once the goal is set, the next step is comparing product features and premiums. If the cost of a $10,000 plan is close to the cost of $100,000 of coverage for a similar time period, obviously the larger policy amount is the better buy. Of course, the larger policy amount will require more medical information, and it's possible a potential insured won't be able to qualify for the larger amount based on health status. The point, of course, is to compare choices, both cost and coverage, to the Final Expense Insurance, to see which one fits both the goal and the budget. Exploring all your life insurance options with a broker face-to-face or online is important if you want to make the best decision.
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